The Intelsat IPO – A Setup for Dilution?

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Intelsat announced it will be going forward with an IPO scaled-down twice – from $1.75-2.0B last summer to $0.75-1.0B two months ago and now somewhere in the $0.5B range. Market demand was cited as a reason. The fact that market demand has been shrinking during a period of increasingly strong stock markets, currently near all-time highs, is not encouraging.

It’s somewhat counter intuitive that the deal would be lowered to address market demand. Intelsat’s biggest challenge is managing its debt load of over $16B. The IPO proceeds will largely be used to pay-down debt. But the smaller $0.5B IPO would pay down only a small fraction of that debt. It would leave the IPO investors in a more risky position than a larger IPO that would pay down more debt and bring leverage ratios to more normal levels. Therefore, one would think that a smaller IPO would be less attractive to the market as it would leave purchasers with stakes in a riskier company.

On the other hand, there is the age-old issue of supply and demand. Selling shares in a more risky company is harder to justify to savvy investors. But with a smaller deal, they need to sell it to fewer people. It just might work, particularly if it is sold to retail investors.

But what will the IPO investors get? They will get shares in a company with more debt than it can comfortably manage. What will the company get? They will get a publicly traded stock. With a publically traded stock they will be able to do things like offer bondholders incentives to covert debt to equity, rights offerings to raise more money and other tools to reduce the debt load. This is great for everyone, except the stockholders who may see endless dilutive deals as a result.

The IPO would also create an exit path for Serafina (the investment vehicle for BC Partners and the other PE owners) who are at the end of a PE firm’s typical 5-year holding period. When their lock-up period expires, Serafina and other holders of the approximately 79% of the shares not sold in the IPO, will be able to dribble their into the open market. But that creates overhang risk for the new public shareholders. Such selling, or even the risk of it, may keep share prices depressed.